ii view: LSE benefits from strong IPO markets

It's integrating the data giant Refinitiv, but LSE shares are down 15% year-to-date. Buy, sell or hold?

Third-quarter trading update to 30 September 2021

• Total adjusted income up 7.6% to £1.69 billion
• Gross profit up 7.3% to £1.55 billion

Chief executive David Schwimmer said:

“The Group is well placed as we make targeted investments in product and technology enhancements to help us meet the needs of our customers and capitalise on the growth trends driving change across our industry."

ii round-up:

The London Stock Exchange Group (LSE:LSEG) today reported rises in both income and profits as it continued to cut costs following its previous $27 billion acquisition of financial data and analytics company Refinitiv.

Both income and gross profit for the third quarter to the end of September rose by just over 7%, broadly matching analysts’ forecasts, although it pointed to some expected slowing in fourth-quarter income growth given tough 2020 comparatives. 

LSEG shares fell by more than 5% in UK trading, leaving them down around 15% for the year-to-date. That compares to a gain of over 11% for the wider FTSE 100 index. 

Full-year cost savings of £125 million following it Refinitiv purchase remain on target, with 10 new revenue synergy products launched during the quarter, taking the total to 37 year-to-date. 

Growth in revenues for all three of its divisions was made, led by a 17% gain for its Capital Markets business given strong IPO markets and growth at its fixed income and ETF Tradeweb platform.

Post-trade revenues gained by 11.5%, while a 6% increase for sales at its data and analytics division was aided by subscription wins for products such as real time data services. 

ii view:

The London Stock Exchange Group is both a global financial markets infrastructure provider and data company. It operates across the areas of data and analytics, risk, collateral and processing solutions, capital formation and trade execution. Its purchase of Refinitiv has moved its centre of gravity away from trading operations and towards data provision.

For investors, cyclicality in certain operations such as company admissions and IPOs needs to be remembered. An estimated forward price/earnings (PE) ratio above the 10-year average also suggests the shares are not obviously cheap, while execution risk in the integration of Refinitiv remains. 

That said, the LSE is uniquely positioned, with a previous takeover attempt from the Hong Kong Exchange a reminder. The purchase of Refinitiv offers cost saving opportunities and also looks to stress the importance of data and its value to the modern world. In all, the company’s unique position appears to underpin favourable long-term prospects. 

Positives: 

• Product and geographical diversity
• Refinitiv cost synergies 

Negatives:

• Subject to regulation
• Factors outside of its control such as macroeconomic uncertainty can hinder performance

The average rating of stock market analysts:

Buy